Barriers to Entry

Is your target industry "permeable"?

My perspective on this critical aspect is as follows: if the success of your business depends on a single category of players who are themselves heavily dependent on another partner to conduct their business, you will find it difficult to pull off your venture, particularly with limited funding.

If you're working on a consumer-facing business, consider the cost of making your product visible to potential end-consumers. This involves assessing how much you'll need to pay Google and other marketing channels to achieve visibility. In certain industries, like travel, the cost is prohibitively high.

In a trade environment, barriers to entry can arise when your target customers are reliant on established vendors both technically and financially. If these customers have designed and implemented most of their internal processes around these vendors' products, replacing the vendor would require re-engineering a significant portion of these processes, which is always a difficult decision. Moreover, if they also depend on these vendors for a portion of their revenues, making that call becomes almost impossible.

When we worked on the first iteration of flyiin, I knew that convincing investors to fund a consumer-facing travel startup, especially one focused on the ‘flights’ vertical, would be a challenge. Industry incumbents were spending billions to attract travelers to their sites and apps. Our bet is that our focus on back-end technology would enable us to create a fresh and innovative digital experience. This would set us apart from incumbents (online travel agencies, metasearch engines) and attract consumers, particularly younger generations. We eventually persuaded a hedge fund of our approach's merit. If you've read the chapter on our story, you're aware of what happened next.

When we pivoted, we encountered a different context. Airline distribution is dominated by three players: the airlines that provide the service, the travel agencies that sell the service, and large tech companies that distribute the service. All travel agencies rely on the systems provided by the tech companies for their operations. Additionally, they receive payments for every flight they sell, and must go through an expensive and lengthy accreditation process to be authorized to sell these flights.

Our strategy aimed to expand the market by onboarding new sellers and providing them with a flight booking platform for instant flight sales. These new sellers would include hotel chains, banks, mobility apps, airline alliances, and e-commerce players—essentially any consumer brand looking to enhance their core proposition by offering flights as an ancillary service. While this approach seemed appealing and logical initially, it became entirely irrelevant when the pandemic hit the travel industry.

Takeaway #3

Homework is, once again, the key here. Establish the barriers to entry in your industry and evaluate the cost of making your way in. Make sure to understand the internal operations and commercial aspects of your target customers to determine their liabilities towards their established vendors.